Do Dividends Affect Firm Value?

Question: Do firms that pay dividends have a higher stock price than firms that don’t pay dividend after accounting for earnings per share and sales per share?

Motivation: The issue of whether dividends impact the value of the firm is a central discussion for students of finance. (My Ph.D. dissertation was on this topic.)

Modigliani and Miller found that if capital markets are perfect dividend policy will not impact the value of the firm. More recent work indicates that dividends can influence firm value when capital markets are imperfect and insiders have better information than outsiders.

Dividend payments are unlikely to increase share value for older firms or firms with fewer growth opportunities. By contrast, high fliers like Amazon and Netflix do not pay dividends.

Dividends can be associated with either higher or lower share prices. The results can differ across industries and across samples of firms.

The Data: The analysis is based on a single cross section of 67 firms. The data was collected in mid-September 2018 after the close of market on a weekend. Roughly half of the firms are large-cap growth firms and the other half are large cap value firms.

The data used in the regression analysis is described in the table below.

Description of Data in Regression Model

Mean

Std. Err.

earnings per share

6.43

1.04

sales per share

160.29

91.41

Positive dividend dummy

0.87

0.04

price of a share

196.51

41.51

The Regression Results:

Regression Results for Share Price Equation

Coeff.

t-stat

Earnings Per Share

10.5

2.36

Sales Per Share

0.2

3.63

Dividend Dummy

-331.0

-4.27

_cons

385.6

4.92

R2

0.66

N

67.0

Discussion of Regression Results

All three variables – earnings, sales and dividend dummy – are significantly related to price per share.

The dividend coefficient is negative suggesting that dividend payments are associated with lower share prices.

Why are dividend payments reducing share value in this sample?

The sample includes some growth names – Facebook, Amazon, Google, Netflix – which do not pay dividends. The sample also includes some more established firms – GE, IBM, Coke, Pepsi and Bank of America – which are not growing fast but do pay dividends.

In this sample, growth prospects appear to have a larger impact on stock price than the promise of dividends.

Traditionally, firm earnings has been considered the more important determinant of stock price. However, the sales coefficient has a larger t-statistic than the earnings coefficient.

Caveats:

The model is built with cross-sectional data. Cross-sectional models often do not explain the change in stock prices over time.

The dividend variable could be an endogenous variable. A second equation that predicts dividend behavior and the level of dividends could be added.

A larger model might include information on capital expenditures and share buybacks.